The Saver’s Credit, which partially subsidizes the retirement savings of lower-income taxpayers, is a frequently overlooked tax credit. If your income is below certain levels, you have an important opportunity to save for retirement with additional help from the government.
Who Qualifies for the Saver’s Credit?
Also known as the Credit for Retirement Savings Contributions, the Saver’s Credit is available to you except if:
- You’re married and your AGI is greater than $55,500 for 2009 ($52,000 for 2008)
- You’re single and your AGI is greater than $27,750 for 2009 ($26,000 for 2008)
- You’re under 18.
- You’re claimed as a dependent on someone else’s tax return.
- You’re a full-time student.
What is the Saver’s Credit Worth?
The Saver’s Credit can be worth up to $2,000 for married couples and $1,000 for single individuals. You do not forgo any of the other tax advantages of saving for retirement if you choose to take this credit. For example, you can still deduct your IRA contribution and receive future Roth IRA distributions tax-free even if you are eligible for and claim the Saver’s credit.
How the Credit Works
The Saver’s Credit is a non-refundable tax credit. When you file your tax return, you or your tax preparer will need to include Form 8880, Credit for Qualified Retirement Savings Contributions. Depending on your income, you will receive a credit of between 10% and 50% of the amount you saved for retirement, up to $1,000 (single) or $2,000 (married). The total saved for retirement includes amounts you contributed to your 401(k) plan, your regular IRA, your Roth IRA, as well as several other qualified retirement plans.
The Saver’s credit is a non-refundable credit, which means that although the credit will either increase your refund or decrease the amount you owe, the credit cannot exceed the total of your tax liability. For example, if your total tax for the year is $800, you have withholdings of $1,250, and you are eligible for a $1,000 Saver’s credit, your income tax refund will be $1,250, not $1,450. The $1,000 credit eliminates the full $800 of tax owed for the year, making your tax liability zero. It does not create an additional refundable $200 overpayment.
You Can’t Take the Money and Run
Your credit will be reduced and possibly eliminated if you take a distribution from your retirement plans during the two years before, the year of, or anytime before the due date of your tax return.
